The Ninth Circuit just upheld a longstanding “gag” rule of the U.S. Securities and Exchange Commission (SEC). The decision leaves the door open for future challenges in specific cases, but for now, the SEC’s decades-old Rule 202.5(e) survives another round in court.
SEC's Gag Rule Under Fire
If the SEC was reluctant to make changes to Rule 202.5(e), that might be in part because it’s been around since 1972. The rule says that if someone settles an SEC enforcement action, they have to agree not to publicly deny the allegations against them. If they break this promise, the SEC can ask the court to reopen the case.
The conflict over the “no-deny rule” really kicked off in 2018. That’s when the New Civil Liberties Alliance (a legal group focused on defending constitutional freedoms) formally petitioned the SEC to change its settlement policy. The NCLA argued that Rule 202.5(e) was unconstitutional. Specifically, they claimed that a rule that bars defendants from denying wrongdoing once a case is settled infringes on free speech rights protected by the First Amendment. They argued that the rule acts like a gag order, stopping them from speaking out against the SEC’s claims even after settling. In their petition, the NCLA asked the SEC to remove this provision of Rule 202.5.
After that initial petition, nothing happened for a long time. The SEC didn’t respond or take any public action for more than five years. During this period, frustration grew among critics of the rule, especially those who had been directly affected by it.
By December 2023, the NCLA decided they couldn’t wait any longer. They filed a renewed petition with the SEC, but this time, they bolstered it. They brought in several new petitioners who had previously settled cases with the SEC and were personally bound by Rule 202.5(e). These individuals joined forces with the NCLA and other organizations like Reason Foundation and Cape Gazette to strengthen their challenge and highlight how the rule was affecting real people.
SEC Stands by Its Rule
The following January, the SEC broke its silence and issued a formal response in the form of a six-page letter. In this letter, the agency stood by Rule 202.5(e), noting that it serves an important function in their enforcement process.
The SEC explained that the rule “preserves its ability to seek findings of fact and conclusions of law if a defendant, after agreeing to a settlement, chooses to publicly deny the allegations.” Basically, the SEC doesn’t want to settle a case and then have the defendant go out and say they didn’t do anything wrong, without giving the SEC a way to respond in court. The SEC also made it clear that it “does not try its cases through press releases,” meaning they don’t want public denials to undermine their enforcement work outside of the courtroom.
The letter also rejected the First Amendment objections that the NCLA had brought up. The agency basically argued that when someone settles with the SEC, they’re voluntarily agreeing to terms that include giving up certain speech rights. According to the SEC, this isn’t unusual; people often waive constitutional rights as part of settlements or plea bargains. The SEC didn’t see this as a violation of the First Amendment because it’s all part of a voluntary deal. If you want to settle, you have to accept the no-deny rule; if you don’t think you did anything wrong, you can choose to fight the case in court instead.
The agency also said that Rule 202.5(e) doesn’t permanently muzzle anyone. Instead, the SEC argues it just provides a way to reopen a case if someone goes back on their word and publicly denies what they agreed not to deny as part of their settlement. In short, the SEC claimed its policy was both lawful and necessary for effective enforcement.
Not everyone at the SEC agreed with this stance; Commissioner Hester Peirce dissented. She thought that denying defendants the right to publicly criticize a settlement after signing it was unnecessary and undermined regulatory integrity. She also said it raised First Amendment concerns. In her view, there was “scant factual basis” for the SEC needing this rule, and if the agency was worried about defendants speaking out, she argued that this policy was “not the right way to protect the Commission's reputation.” But Commissioner Peirce seems to have been alone in sympathizing with the petitioners.
Legal Battle Hits Court
After the denial, the unhappy twelve petitioners took their challenge to federal court, tacking on a claim under the Administrative Procedure Act (APA) in addition to their previous First Amendment claim. They laid out three arguments as to why the rule violated the APA.
The case made its way to the Ninth Circuit Court of Appeals. The court handed down a ruling on the merits on Wednesday, first rejecting all of the plaintiffs’ claims under the Administrative Procedure Act (APA) before turning to the constitutionality.
First, the plaintiffs argued that the SEC didn’t have statutory authority to enact Rule 202.5(e) under the APA. The court disagreed, saying the SEC has broad powers to set settlement terms and can announce its policies publicly. Second, the plaintiffs argued that Rule 202.5(e) was invalid because it wasn’t adopted through notice-and-comment rulemaking. The court said that’s not required here, since the rule is a statement of policy or practice (not a formal regulation). Third, the plaintiffs claimed the SEC didn’t give a rational explanation for refusing to amend the rule. The court, however, found the SEC’s six-page letter was enough and explained its reasoning clearly. Judicial review of these agency decisions is “extremely limited and highly deferential,” so the court let it stand.
In sum, the Ninth Circuit found no APA violations and denied all those claims. The court then turned to the First Amendment question.
A Waiver of Rights
The Ninth Circuit focused on whether Rule 202.5(e) is unconstitutional on its face, meaning whether it’s always unconstitutional in every application — not just in specific situations. The court pointed out that while there are good reasons to be wary of government efforts to limit criticism (especially from people accused of wrongdoing), this case was about whether people can voluntarily give up some rights as part of a deal with the government.
As the SEC pointed out in its letter, people can waive constitutional rights (including free speech) if they do so knowingly and voluntarily. Courts have upheld similar waivers in both criminal and civil cases, as long as there’s a close connection between what’s being given up and what’s being gained in return.
In this context, defendants who settle with the SEC are often represented by lawyers and make a calculated choice: settle and agree not to deny allegations publicly or fight it out in court. The court said there was no evidence that all or most settlements are coerced or involuntary. It also found that there’s a logical link between what the SEC wants (finality in settlements and avoiding mixed messages about what happened) and what defendants give up (the right to publicly deny allegations).
The court also pointed out that the restriction is pretty narrow. Plus, the only consequence for breaking it is not as severe as automatic punishment or censorship. Rather, the SEC might ask a judge to reopen the case.
Narrow Ruling Leaves Door Open
In the end, the Ninth Circuit denied all of the petitioners’ claims, but not without making it clear that its decision was narrow. It only addressed whether Rule 202.5(e) is always unconstitutional on its face, not whether it might be unconstitutional in certain cases. If future settlement agreements go beyond what Rule 202.5(e) says (e.g., by banning indirect denials or forcing defendants to police other people’s speech), those could raise new constitutional problems. Also, if someone argues in a specific case that their waiver wasn’t truly voluntary or was too broad, courts should look at those facts closely.
While this particular challenge failed, future lawsuits with slightly different facts could still be successful, especially if the SEC tries to impose more sweeping restrictions.
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